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Spectrum Auctions: What's the Best Format?

Paris

The Forum Europe 6th European Spectrum Management conference, held in Brussels on 14-15 June, included a panel discussion dedicated to spectrum auctions. The session was a mix of defining formats and describing plans by regulators for past or upcoming auctions.

The Forum Europe 6th European Spectrum Management conference, held in Brussels on 14-15 June, included a panel discussion dedicated to spectrum auctions. The session was a mix of defining formats and describing plans by regulators for past or upcoming auctions.

Dr. Sören Sorensen, a Senior Consultant in NERA's Communications Group, began by giving an overview of the three families of auction formats:

the Simultaneous Multiple-Round Auction (SMRA);

the sealed bid auction format; and

the Combinatorial Clock Auction (CCA)

The SMRA auction is the oldest and most well established auction format, and is relatively easy to understand. It allows auction participants to receive information on how other bidders value the spectrum. But the SMRA auction has drawbacks, such as encouraging bidding strategies that may not reflect precisely the economic value given to spectrum by the auction participants.

Also the SMRA does not permit one to eliminate the “aggregation risk,” which is the risk that the bidder may end up with certain blocks of spectrum, but not all the blocks that the bidder wanted or needed for its business plan.

The sealed bid auction has the drawback of not permitting bidders to see how the spectrum is valued by other auction participants. The sealed bid auction permits regulators, however, to include non-financial criteria in the selection process. For example, the French regulator has designed a system that would give additional points if the bidder undertakes to open its network to MVNOs. France announced this week that will rely on this approach for its upcoming auctions of spectrum in the 800 MHz and 2.6 GHz ranges. (See our description of the French announcement below.)

The UK regulator Ofcom is preparing a CCA auction for the 800 MHz and 2.6 GHz spectrum. Ofcom’s Graham Louth explained that the CCA format, while apparently more complex, in theory permits the optimal outcome in terms of efficient spectrum usage. In the CCA auction, Ofcom will gather information from bidders on how they value various packages of spectrum. Ofcom will then apply a complex algorithm to distribute among auction participants ideal packages of spectrum that meet as closely as possible the participants’ valuation priorities. The price paid by a bidder for the package assigned to him will be the price bid by the second highest bidder for that package. The bidder is guaranteed that it will never have to pay more than the amount bid, and in reality the price will often be less. Some members of the audience commented that the system is not always easy to explain to the bidder’s CEO!

Mr. Louth emphasized that the philosophy of the CCA auction is different from that of an SMRA auction in that in the CCA auction bidders do not bid against each other in an adversarial fashion. It is Ofcom’s belief that the outcome of an adversarial bidding process does not necessarily lead to the optimal use of spectrum from the point of view of consumers and citizens.

The CCA format gives incentives to bidders to reveal the true value that they attribute to spectrum, instead of the value that may result from strategic considerations in an adversarial bidding context. The CCA auction also eliminates the aggregation risk because a bidder will only be given one the packages that it wanted. A bidder will not end up with only a partial package.

Dr. Rüdiger Hahn from BNetzA, the German regulator, described the German super auction that was conducted one year ago in which a total of 360 MHz of spectrum was auctioned in SMRA auction format.

The reason for putting the spectrum together in a single auction was to avoid regulatory-induced scarcity, according to Dr. Hahn. He also described BNetzA’s choice to use the straightforward and the well tested SMRA format on the theory that it was better to organize an auction early and get the spectrum out in the market quickly, as opposed to fine-tuning the “perfect” auction format. Because spectrum is tradable, Doctor Hahn points that any errors in the initial allocation could be corrected by the market afterward.

Dr. Hahn mentioned that Germany is the first country to get the digital dividend spectrum in the market and that by the end of 2011 there will already be 1,000 base stations installed for 800 MHz services. (Dr. Hahn also described spectrum auctions in a European Workshop on Spectrum Auctions held on 29 October 2010, in a presentation titled “How to Manage an Auction.”)

We have seen that these auction rules are sufficiently complex that regulators routinely hold consultations for interested parties. For the upcoming Swiss super auction, also a CCA format, the Swiss Federal Communications Commission and the Office of Communications invited representatives of companies interested in participating in the auction to meet together with DotEcon, the consultancy firm brought in for the auction. Before it held its auction, Germany’s BNetzA even held a mandatory tutorial for bidders. A person with a power of attorney for each bidder was required to take part in this tutorial, in order to obtain instructions in the practical conduct of the auction.